Each year, you often see the same trend over and over: “Buy the weakest sectors and dump the strongest.”  Maybe there is a value in the weakest links and maybe too much a premium in the strong sectors.  The Financial Select Sector SPDR (NYSE: XLF) is off to a great start in 2012, while the Utilities Select Sector SPDR (NYSE: XLU) has been very weak.

All you have to do is look at the extremes… Bank of America Corporation (NYSE: BAC) was the worst DJIA stock of all in 2011 but now shares are up literally 19% since the end of 2011.  J.P. Morgan Chase & Co. (NYSE: JPM) is even up over 9% since the end of 2011 and it has earnings due in just two days.  With the huge discounts to book value, the thought is that there is value even with the headwinds facing the banking sector’s ability to generate solid earnings.  BofA was recently shown as one of the DJIA stocks with the most implied upside.

What about American Electric Power Co., Inc. (NYSE: AEP) bounced a bit off the lows in the last two days but its shares had been down almost 2% so far this year after just six trading sessions. Duke Energy Corporation (NYSE: DUK) was down almost 3% from the end of 2011 before a small bounce.  Many utilities are trading at close to 13-times earnings now, which historically could imply a premium being paid to get those dividend yields of 4% and higher.  AEP remains in our 2012 Model Dividend Portfolio and that will only change if the price rises too much.

All you are seeing is a reverse of the flight to safety because many believe that the economy has escaped another recession or that the worst was priced in.  Before giving up entirely, interest rates are likely to remain very low and that drives investors toward stable income sources.  Utilities also win from low interest rates because of borrowing costs.  As far as the banks, the woes of Europe are not yet gone and the utilities have little to no real exposure there.  If everyone is wrong about no second recession, which has better visibility… utilities or banks?

JON C. OGG

Active Power Inc. (NASDAQ: ACPW) Started as Buy at Merriman.
Applied Materials, Inc. (NASDAQ: AMAT) Cut to Underperform as Bear of the Day at Zacks.
Arch Coal Inc. (NYSE: ACI) Raised to Outperform at BMO.
Barclays PLC (NYSE: BCS) Raised to Buy at UBS.
Brightpoint Inc. (NASDAQ: CELL) Raised to Buy at Citigroup.
Cabot Oil & Gas (NYSE: COG) named Bull of the Day at Zacks.
Duke Energy Corporation (NYSE: DUK) Raised to Sector Perform at RBC.
HCA Inc. (NYSE: HCA) Started as Buy at Auriga.
Medtronic, Inc. (NYSE: MDT) Raised to Hold at Argus.
OM Group, Inc. (NYSE: OMG) named Value stock of the day at Zacks.
Portugal Telecom SGPS SA (NYSE: PT) Started as Neutral at Credit Suisse.

Your email address

subscribe

terms and conditions

JON C. OGG

UBS has issued a brief report that hurricanes tend to have little impact on GDP and on Federal Reserve policy, but one notion that they do influence is employment.  The observation is that companies in hurricane areas tend to push out their new hiring decisions by about a month.

We wanted to take a look at just some of the companies in each sector that would win and lose from the aftermath of Hurricane Irene.  You can imagine that insurance companies are going to be hit by damage claims, but what about power, water, and telecom?  And imagine the construction and rebuilding business.  And the building supplies and service providers.

Allstate Corporation (NYSE: ALL) and The Travelers Companies, Inc. (NYSE: TRV) have exposure in the areas around North Carolina.  That is where the landfall is expected first.  Perhaps more worrisome is the upper Eastern Seaboard where Hurricane Irene is expected to strafe this weekend. The Chubb Corporation (NYSE: CB) has exposure in New York and on north throughout southern New England, as does Allstate and Travelers.  Chubb noted on its site, “Hurricane Irene Alert: Chubb is helping its customers prepare for the storm.”  Allstate also has a claim and preparedness site.

Berkshire Hathaway Inc. (NYSE: BRK-A) is also likely not immune as Mr. Buffett has joked in the past that he was lucky enough to avoid hurricanes for two straight years.

Duke Energy Corporation (NYSE: DUK) spoke on CNBC this morning saying that while they do expect damage that they have their staff ready to go to assist in the region.  Power lines and power equipments tend to not do well in floods, 100 mile an hour wind, lightning, and with flying debris.  Dominion Resources Inc. (NYSE: D) saw a brief outage at a nuclear plant this week due to the earthquake, but it has already said that its Virginia and North Caroline units are preparing for the aftermath.  Entergy Corporation (NYSE: ETR) has the often controversial Indian Point nuclear power plant located about 35 miles the middle of Manhattan.

This could have an impact on American Water Works Company, Inc. (NYSE: AWK) as well, even though this company is very diversified throughout parts of America.  The New Jersey based water utility has operations at risk in North Carolina, Virginia, Maryland, Pennsylvania, New York, New Jersey, Connecticut, Rhode Island, and Massachusetts.

Verizon Communications Inc. (NYSE: VZ) is also diversified all over the United States, particularly on wireless.   That being said, it has real land line and phone line exposure throughout much of the projected areas in New York and the Northeast as the former Bell Atlantic.

We have given previews using Thomson Reuters Consensus data, shown price ranges, trading ranges, shown a Thomson Reuters analyst consensus price target, and added in color on most companies.

MONDAY

Chimera Investment Corporation (NYSE: CIM) has estimates of $0.15 EPS and $175.58 million in revenues; next quarter estimates are $0.14 EPS and $173.62 million in revenues.  Shares are trading around $3.09, the 52-week trading range is $2.62 to $4.36 and the consensus price target from analysts is $4.18.  Chimera is not going to be a market mover, but it will highlight some of the issues facing the leveraged MBS REIT players.  Will it be able to maintain what was recently tallied up as being nearly 17% on an annualized basis.  Per its REIT status, Chimera is required to distribute at least 90% of its REIT taxable income to shareholders.

Humana Inc. (NYSE: HUM) has estimates of $2.06 EPS and $9.32 billion in revenues; next quarter estimates are $1.97 EPS and $9.21 billion in revenues.  Shares are trading around $74.38, the 52-week trading range is $45.36 to $84.32 and the consensus price target from analysts is $88.22. Humana will follow three other healthcare insurers in earnings, and so far it is UnitedHealth which has hit highs and is so far winning the race this earnings season.

TUESDAY

Archer-Daniels-Midland Company (NYSE: ADM) has estimates of $0.85 EPS and $20.43 billion in revenues; next quarter estimates are $0.76 EPS and $18.33 billion in revenues.  Shares are trading around $30.74, the 52-week trading range is $26.50 to $38.02 and the consensus price target from analysts is $38.71. The saga continues for ADM.  With a $20 billion market cap this would still have to run 50% to challenge the old agriculture and energy highs seen in 2008.

Coach, Inc. (NYSE: COH) has estimates of $0.65 EPS and $1.01 billion in revenues; next quarter estimates are $0.69 EPS and $1.00 billion in revenues.  Shares are trading around $64.50, the 52-week trading range is $35.06 to $69.20 and the consensus price target from analysts is $67.52. Coach is one company that investors will use as a proxy for luxury or at least “above the middle of the pack” when it comes to previewing retail earnings that are about two weeks or three weeks out.  The purse and apparel accessories giant is actually worth a whopping $19 billion in market cap now.  Coach’s guidance could signal the trend of things to come in the higher-end and above the middle retail segment.

DryShips Inc. (NASDAQ: DRYS) has estimates of $0.18 EPS and $270.74 million in revenues; next quarter estimates are $0.21 EPS and $320.2 million in revenues.  Shares are trading around $3.75, the 52-week trading range is $3.56 to $6.44 and the consensus price target from analysts is $6.25. DryShips does not run the market and it does not even really influence other shippers.  The Greek aspect cannot be helping matters, but it is now in the midst of an acquisition after having been a serial capital raising company.  The concerns actually have this one close to 52-week lows and it is not unusual to see massive volume spikes when DryShips has news.

Calpine Corporation (NYSE: CPN) Raised to Buy at BofA/ML.
Computer Sciences Corporation (NYSE: CSC) Cut to Sell at Goldman Sachs.
Duke Energy Corporation (NYSE: DUK) Raised to Neutral at Goldman Sachs.
Exelon Corporation (NYSE: EXC) Raised to Buy at BofA/ML.
FirstEnergy Corporation (NYSE: FE) Raised to Buy at BofA/ML.
General Electric Co. (NYSE: GE) Maintained Outperform but cut estimates at Credit Suisse.
Intuit Inc. (NASDAQ: INTU) Raised to Buy at UBS.
McDonald’s Corporation (NYSE: MCD) Reiterated Outperform and raised target to $97 at Credit Suisse.
Melco Crown Entertainment Ltd. (NASDAQ: MPEL) Reiterated Buy and raised target to $18 at BofA/ML.
Motorola Solutions Inc. (NYSE: MSI) Raised to Buy at Jefferies.
Pandora Media, Inc. (NYSE: P) Started as Overweight at JPMorgan; Started as Outperform at Wells Fargo; Started as Outperform at William Blair; Started as Buy at Citigroup.
Pan American Silver Corp. (NASDAQ: PAAS) Cut to Hold at Canaccord Genuity.
Pepsico Inc. (NYSE: PEP) Cut to Neutral at Goldman Sachs.
The Travelers Companies (NYSE: TRV) Maintained Underperform as Bear of the Day at Bear of the Day
VAALCO Energy, Inc. (NYSE: EGY) Reiterated Buy as Value at Zacks.
Watson Pharmaceuticals (NYSE: WPI) Raised to Outperform as Bull of the Day at Zacks.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Some of the more recent dividend hikes in the utility sector have been in shares of Duke Energy Corporation (NYSE: DUK), American Water Works Company, Inc. (NYSE: AWK), American States Water Company (NYSE: AWR), Xcel Energy Inc. (NYSE: XEL), and DTE Energy Co. (NYSE: DTE).  What we are trying to show you is that the trend of dividend hikes is not without precedent in utilities.

24/7 Wall St. is looking for utility dividend hike candidates after some recent hikes in the sector.  We have evaluated 9 large-cap or mid-cap dividend producing utility stocks for investors where you can expect a dividend hike in the coming months.  These include, in alphabetic order: American Electric Power Co., Inc. (NYSE: AEP), Constellation Energy Group, Inc. (NYSE: CEG), Dominion Resources, Inc. (NYSE: D), Entergy Corporation (NYSE: ETR), FirstEnergy Corp. (NYSE: FE), NextEra Energy, Inc. (NYSE: NEE), Pinnacle West Capital Corporation (NYSE: PNW), PPL Corporation (NYSE: PPL), and Progress Energy Inc. (NYSE: PGN).

Now that the Supreme Court has rejected some carbon-cutting measures, some additional drag has been removed from this sector that might have otherwise been victim to higher ten-year Treasury yields.  We would also like to note that we have tried to consider mergers in our analysis as this sector continues to consolidate.  Our basis is more of a standalone merger basis rather than solely due to mergers  into consideration here because we are looking for the companies which can grow their dividends based solely upon their own metrics.

American Electric Power Co., Inc. (NYSE: AEP) is perhaps our favorite utility and it was named as one of our ten stocks to own for the next decade.  Its shares recently traded at $38.18 and has a current dividend yield of 4.9%.  Its 52-week trading range is $30.34 to $38.99.  Thomson Reuters has estimates of $3.13 EPS for 2011 and $3.22 EPS for 2012.  AEP has had three straight quarters of a $0.46 dividend and this is likely to be grown in the months ahead.  The prior $0.42 quarterly dividend was only in place for two quarters before being raised.  The current pace comes to $1.84 per year.  Our take, look for $0.48 per quarter.  We are not looking for an equal hike this time around as earnings growth is only expected to be almost 3% next year.

Constellation Energy Group, Inc. (NYSE: CEG) is often treated as a controversial stock in the world of utilities.  While we said we are not taking M&A into consideration, it is in a pending deal with Excelon and we are still evaluating this on a standalone basis.  It recently traded at $37.70 and has a current dividend yield of 2.55%.  Its 52-week trading range is $27.24 to $37.87.  Thomson Reuters has estimates of $3.20 EPS for 2011 and $2.46 EPS for 2012.  Its dividend used to be far higher and has been $0.24 per quarter for about ten quarters in a row.  It is hard to know about the “when” but the “if” seems a shoe-in if it somehow is not merged.

Dominion Resources, Inc. (NYSE: D) recently traded at $48.61 and has a current dividend yield of almost 4.1%.  Its 52-week trading range is $36.98 to $49.07.  Thomson Reuters has estimates of $3.14 EPS for 2011 and $3.25 EPS for 2012.  The company has been in the habit of hiking payouts more than once a year if the last hike was a sign.  If no dividend hike is made in the fall, it could be announced late this year.  The current payout is $1.97 per year, leaving well more than $1.00 per share for operations ahead.

Areva made our list of the 25 most important alternative energy companies back in October.

Lauvergeon has turned Areva into a vertically integrated nuclear power provider that did everything from mining uranium to re-processing spent fuel. She was also making some effort to bring Areva into the renewable energy market. Her replacement is not expected to tear apart the one-stop shop Lauvergeon created, even though it is not popular with some of Areva’s board members.

But the story is not so much one of personality as it is one of vision. Under Lauvergeon, Areva competed with GE and the others to come up with a nuclear plant design that could be as easily replicated as a Big Mac. Instead of designing every plant from scratch, the big idea was to put together a kit that could be scaled as needed for a particular application. Such a plant could cut design costs, simplify regulatory approvals, and reduce construction costs.

Now, though, new designs probably don’t matter. The continuing disaster in Japan has cooled, if not killed entirely, the construction of new nuclear power plants. Germany and Italy have both decided to stop new construction, and Germany will close all existing plants over the next 11 years. Even China is re-considering its vast commitment to new nukes in light of events in Japan.

Alt-energy generation may be reaching a tipping point as solar PV is getting close to pricing parity with fossil-fuel generation during peak demand periods and new grid storage is being developed to deal with the intermittency problems of both solar and wind generation. Nukes are terribly expensive and have a terrible public image, even worse than coal. Coal may lower our quality of life, but nukes can wipe us all out.

Another issue that works against nukes is the growing tendency of power generation to be distributed among many smaller plants rather than one large centralized plant. What’s going on here is something akin to the network effect we’ve all come to see in the technology world. As the network (in the case of power, the grid) gets better, more things can be and are connected to it, making the network both more valuable and cheaper.

Large power generators will survive only by getting larger and spreading their geographic footprint. In the US, mergers and acquisitions in the utilities sector are growing as the big utilities like Excelon Corp. (NYSE: EXC) and Duke Energy Corp. (NYSE: DUK) spend billions to expand by buying up other big utilities. Ultimately though, even this strategy will have to change as the network effect of distributed generation will gradually overtake the traditional centralized generation model.

Areva is, to coin a phrase, too big to fail — at least anytime soon. The same is true of the other nuclear plant builders and many of the utilities as well. Somehow though, it seems like all they’re doing is re-arranging deck chairs on the Titanic.

Paul Ausick

Following the disaster at Japan’s Fukushimi Daiichi nuclear plant, many countries reviewed their plans for continued development of nuclear power generation. Germany concluded that it would halt new development, while the US is gingerly considering going ahead with both relicensing of existing plants for an additional 20 years and with new nuclear plant development.

Switzerland has decided to follow Germany’s lead and to phase out its nuclear generation fleet. The Swiss produce about 40% of the country’s electricity from nuclear power, so this is a big deal. Many of Switzerland’s utilities were surprised by the government’s decision, which must still be finalized by the Swiss parliament. One company, with plans to build two new nukes, has warned that energy costs will increase as a result of the decision.

The government plans to invest in new hydropower plants and to increase investment in solar and wind energy. No specific figures were presented, and a government spokesperson admitted that fossil fuels could be used to replace some of the nuclear supply.

Nothing will happen immediately as Switzerland’s five reactors have operating licenses running through 2020 and 2040. But if the government’s decision is upheld, the next argument is likely to be over renewables vs. fossil fuels and hydropower.

China’s Nobao Renewable Energy Holdings Ltd. has cited “general market conditions” as its reason for indefinitely postponing its planned IPO. The company had planned to price the IPO yesterday and had hoped to raise $300 million. The company planned to list its ADSes on the NYSE under the ticker symbol “NRE.”

The company had withdrawn an IPO in April 2010, after it had trimmed its offering size back to $180 million during the height of the European debt crisis. This latest withdrawal could be the result of recent reports of accounting shenanigans among Chinese firms. China’s Jiayuan.com International Ltd. (NASDAQ: DATE), a web-based matchmaking service, and Renren Inc. (NYSE: RENN), a social networking site, both suffered virtually immediate reversals to euphoric IPOs.

Finally, an upstate New York utility, CH Energy has sold its last renewable energy unit, a wind farm in Wisconsin, to a unit of Duke Energy Corp. Terms of the sale were not disclosed. The wind project began operation in December 2010, and includes eight 2.5-megawatt turbines. CH had a 20-year power purchase agreement with Wisconsin Public Service Corp.

CH invested about $50 billion in the wind farm beginning in 2009. It’s a fair bet that Duke didn’t pay that much to acquire it, both because CH has altered its strategic thinking to eliminate its renewables portfolio and because the state of Wisconsin could make it more difficult to expand wind farm capacity. This acquisition was likely just a relatively cheap way for Duke to beef up its renewables portfolio.

Paul Ausick

Our daily “Dividend Watch” does not always look for the highest dividends on an absolute basis, but we look for either the most stable dividends or those which can be raised easily through time and we generally look for the companies large enough with a core market that can stand better through time than smaller peers.  What we like about the electric utilities today is that these offer high income and they are defensive stocks in nature.  Simultaneously, they do offer some growth, yet also offer value investors plenty of value. Another worry might be the build-out of the power grid that has continually been an argument, but that and the commodity worry must be a combined non-starter… Many utility shares are hitting 52-week highs.

American Electric Power Co., Inc. (NYSE: AEP) trades around $37.00 and its 52-week trading range is $28.26 to $37.94.  It has a market cap of almost $18 billion and pays investors right at 5.0% in dividend yields.  We would warn against expecting another immediate dividend hike as it raised its $0.41 dividend that had been static from November-2007 to February-2010, but then it raised it to $0.42 for two quarters and then to $0.46 for the last two.  AEP has been diversifying its portfolio of electric power sources with more renewables to its 5+ million customers in 11 states.  The current annualized payout of $1.84 compares to Thomson Reuters estimates of $3.13 EPS for 2011 and $3.24 EPS for 2012.  Based upon this, we’d expect that dividend raise to go to $0.47 or $0.48 per quarter at the next dividend hike.  Analysts have a consensus price target objective here of $38.75, although we would expect some to lift targets if that is achieved.

Duke Energy Corporation (NYSE: DUK) is one which many investors had looked the other way on after its 2007 spin-off of Spectra.  What is interesting is that it raised its dividend through the recession and its $0.245 payout may be up for being raised again soon. Shares just hit a new 52-week high of $19.00 today and it has a market cap of about $25 billion.  It also pays investors close to a 5.2% yield.  The company just reported a 15% rise in net income and it is in the midst of the merger with Progress Energy, Inc. (NYSE: PGN).  This deal is going to transform Duke, but Progress also has a yield of close to 5.2%.  The company claims to only be spending $90 million for the first integration, which means that a profit boost may be able to flow immediately to the bottom line.

FirstEnergy Corporation (NYSE: FE) is in the news this morning because of a blowout earnings report, or at least on guidance.  Shares are up 5% at $41.65 but the stock hit a new 52-week high of $41.77 against a low of $33.57.  It also has a market cap of about $12.7 billion and it pays investors about 5.3% in dividend yields even at the highs today.  What makes First Energy so interesting is that it is only about half of its pre-recession share price peak and its $0.55 per quarter dividend has been static since early 2008.  The company earned only $0.15 for the quarter, but that would have been $0.69 EPS had it not been for the shares issued for the acquisition of Allegheny and due to higher operation and maintenance costs.  This $2.20 payout compares to raised guidance of adjusted earnings per share of $3.20 to $3.50 for 2011 through 2013. We are not looking for a big dividend increase immediately, but 5.3% should entice investors looking for ‘coupon income’ in stocks.

For those who want to smooth out the noise of individual companies and still get a handsome dividend, there is always the Utilities Select Sector SPDR (NYSE: XLU).  We evaluate this because the rise in commodities would be punishing it if there was going to be a blow-up in the utility sector’s earnings.  Shares are at $33.52 and it hit a new 52-week high of $33.56 today.  As this is a fund (ETF), it has a variable quarterly payout but the average of the payouts comes to a yield of roughly 4.0% for investors.

If you want to know just how committed utilities are to dividends, American Electric Power and Duke are in a consortium called Defend My Dividend, which aims to lobby Congress not to boost the dividend tax all over again as it did in the past.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

A new report from IMS Research has shuffled the deck a bit on the largest solar PV module suppliers in 2010. Suntech Power Holdings Co. Ltd. (NYSE: STP) has captured the top spot, replacing First Solar Inc. (NASDAQ: FSLR) which held the top ranking in 2009 and fell to second in the 2010 ranking. Both Canadian Solar Inc. (NASDAQ: CSIQ) and Hanwha SolarOne, Ltd. (NASDAQ: HSOL; formerly Solarfun) moved up two places in the rankings, to sixth and ninth places, respectively. SunPower Corp. (NASDAQ: SPWRA) lost two places, coming in at the eighth spot.

Suntech’s shipments of solar PV modules grew by 130% in 2010, while First Solar’s shipments grew by less than 50%. The ranking changes favored China’s low-cost producers, while US producers First Solar and SunPower, the only US companies in the top ten, both fell in the rankings. The IMS Research report also noted that JA Solar Holdings Co., Ltd. (NASDAQ: JASO) increased production by 180% in 2010 and is now the world’s largest producer of solar PV cells.

In a related solar story, First Solar’s head of operations is leaving the company at the end of April and he could be looking to find a CEO role at another solar maker. Bruce Sohn was passed over for the CEO position at First Solar, but his expertise at manufacturing processes would surely be welcomed at any number of competitors. It is likely, however, that First Solar has a non-compete agreement with Sohn, so he could have to wait a year or more before landing a CEO job.

Recent research from Cornell University charging that methane releases from hydraulic fracturing in shale gas deposits has drawn a quick reply from at least one industry group. The rebuttal points to five specific issues it has identified with both the methodology and the conclusions of the Cornell study.

A lot of the rebuttal is “inside baseball.” For example, the group points out that the Cornell research blames lost and unaccounted for gas for the loss of between 1.4% and 3.6% of all gas produced. All that gas is not necessarily lost because at least some of it is used to process the gas and to power the compressors that push the gas through the pipelines.

If the gas is really lost, then that’s a significant problem. But if, as the industry claims, the lost gas reflects an accounting problem, then it could be no issue at all, or at least a smaller one.

It’s here that producers have to take on a share of the blame for the accusations they make against the Cornell study. There is little reliable, publicly available data on most of the issues the Cornell researchers tried to address. The industry claims a proprietary interest in all sorts of information, from the contents of its hydraulic fracturing fluids to the actual amount of gas produced at a given well.

The industry’s own demand for secrecy works against it in cases like this. When an issue such as lost gas and methane emissions makes the news, the industry’s first reaction is to deny everything. The next reaction is to delay for as long as possible providing any useful data.

The position boils down to, “Trust us — we know what we’re doing.”

That’s not good enough, especially after trusting led to last year’s disaster in the Gulf of Mexico. A better model might be that old Cold War policy: “Trust — but verify.” That means regulation, probably federal, which is even more an anathema to the industry than the press or the public.

Finally, Duke Energy Corp. (NYSE: DUK) has signed a deal to install a 36-megawatt battery storage system at its Notrees wind farm in west Texas. The system will use dry-cell battery technology supplied by Xtreme Power Inc. to store power from the 153-megawatt wind farm when demand is low or when the wind is not blowing. Using large battery technology to even out intermittent generation from wind or solar generation is getting a toe-hold this year, and could be on its way to playing a larger role in alt energy projects.

Paul Ausick